The Fed and the Secular Decline in Interest Rates

Abstract

This paper documents a striking fact: a narrow window around Fed meetings captures the secular decline in U.S. Treasury yields since 1980. Yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. However, Fed announcements might provide guidance about the long-run path of interest rates. In direct support of such "Long-run Fed Guidance", the Fed’s expectations for the long-run level of the federal funds rate – released through the "dot plot" – strongly impact long-term bond yields.